There will be two federal budgets this year: the Morrison Coalition government’s budget handed down in March 2022, and the Albanese Labor government’s upcoming federal budget to be delivered on 25th October.
The Federal Budget October 2022 – expected to deliver some pre-election Labor promises – will arrive against a backdrop of successive interest rate increases by the Reserve Bank of Australia (RBA) as it attempts to rein in the highest inflation rate Australia has seen since 2001.
Facts and figures
Inflation entered negative territory at the start of the COVID pandemic in the June quarter of 2020, but since then has risen steeply (except for a second brief lockdown dip in September 2021). The annual inflation rate now stands at 6.1%.
The RBA interest rate stayed at a historic low of 0.1% from November 2020 until April 2022. Since then it has risen each month:
Causes of inflation
Escalating inflation over the last two years has a number of causes. In the September quarter of 2020 the CPI percentage was emerging from an unusual low point at the start of pandemic lockdowns. As restrictions gradually eased, pent-up demand for goods now in short supply was released, driving up prices.
Then, in February 2022, Russia invaded Ukraine, sparking economic sanctions, supply chain disruptions, a shortage of essential raw materials used in global manufacturing and agriculture, and a sudden spike in energy prices. Significantly higher fuel costs spread the cost increases across many sectors of the economy reliant on transport, such as food and household goods.
Effects of inflation
Australian consumers and businesses are really feeling the pinch. Australian Bureau of Statistics (ABS) figures for the June 2022 quarter show that the biggest annual price increases occurred in transport (13.1%) housing (9%), household goods and services (6.3%), and food (5.9%). Meanwhile, Australian annual wage increases (2.6%) lagged behind overall inflation (6.1%) and the RBA lifted interest rates, adding to the pressure on households as mortgage repayments rose and wages fell in real terms. In response, wages are now beginning to rise, adding to fears of a continuing wage-price spiral.
Causes of interest rate rises
The cash rate or base interest rate is a lever used by central banks – such as the RBA – to encourage or depress consumer spending, depending on the prevailing economic conditions. During the COVID pandemic, cash rates were set at a historic low. This latest round of RBA interest rate rises is an attempt to bring inflation back within its target rate of 2-3% per annum.
Effects of interest rate rises
House prices and household debt grew strongly through 2021. But now that interest rates are rising, house prices are falling while the rise in the cost of living continues. Some overstretched mortgage holders – especially recent entrants to the market with high loan-to-value ratios – may have difficulty in servicing their loans. The RBA’s opinion is that most households are in a reasonable position as a result of two main factors: the lifting of the mortgage serviceability buffer (required of banks when assessing loan applications) to 3 percentage points in October 2021, and the household savings cushion accumulated during the pandemic. However, if interest rates keep on rising, this could change dramatically.
Businesses face an increased cost of borrowing and possible postponement of growth plans, which reverberates throughout the economy. Their other expenses are also increasing as a result of inflation and pressure on wages. Consumer spending is likely to fall following the rise in cost of living and mortgage repayments, resulting in reduced sales and profit.
What to expect from Federal Budget October 2022 as a result
A joint statement released on 28th September by Treasurer Jim Chalmers and Finance Minister Katy Gallagher provided some strong hints about what to expect from the upcoming federal budget. A better-than-expected cash deficit of $32 billion for 2021-2022 does not mean that the budget will be loaded with sweeteners, since government debt remains at close to a trillion dollars and becomes more expensive to service as interest rates rise globally. Meanwhile, costs of the NDIS, health, aged care and defence have also grown.
However, the announcement emphasised that the October budget will contain ‘responsible cost-of-living relief, investing in the potential of our people and capacity of our economy, and beginning the hard task of longer-term Budget repair’, and there have been strong indications of the format this is likely to take:
- Lower medicine costs. The price of PBS scripts will fall by almost 30%.
- Increased childcare subsidies. Legislation to increase federal childcare subsidies has been tabled in parliament.
- Further reductions in cost of living pressures. Hints have been dropped about other measures, but limited detail is available.
- Funding of labour shortage mitigation. The permanent Migration Program ceiling has been lifted to 195,000 for 2022-23, and retirees will be able to earn more before losing age pension payments.
- Upskilling to assist the economy. Provision of $1 billion for fee-free TAFE in 2023 and accelerated delivery of 465,000 fee-free TAFE places. Other upskilling investments may be included in the federal budget.
- More pressure for wage increases. Labor supported the 5.2% increase to the minimum wage earlier this year. There may be other carrots or sticks for employers in the October budget.
Supporting the RBA’s attempts to curb inflation while relieving the cost of living burden and containing – or possibly reducing – government debt is a difficult juggling act for the government. Exactly which levers it intends to pull will become clear on 25th October.
To stay informed, keep watching this space. Bentleys’ Australia-wide expert team will be following closely and providing updates as the Federal Budget unfolds. If you’d like to discuss what this Budget might mean for your business, don’t hesitate to contact your local Bentleys advisor for a chat. We can help you get where you want to be.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.